Chapter 11, Problem 19P

1.

To determine

Prepare a schedule screening the depreciation expense, amortization expense, accumulated depreciation and amortization for each asset that would appear on the income statement and balance sheet of Company B for the year ended December 31, 2019.

Explanation of Solution

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

Straight-line depreciation method: The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset is referred to as straight-line method.

Sum-of- the-years’ digits method: Sum-of-the years’ digits method determines the depreciation by multiplying the depreciable base and declining fraction.

Double-declining-balance method: The depreciation method which assumes that the consumption of economic benefits of long-term asset is high in the early years but gradually declines towards the end of its useful life is referred to as double-declining-balance method.

Prepare a schedule screening the depreciation expense, amortization expense, accumulated depreciation and amortization for each asset that would appear on the income statement and balance sheet of Company B for the year ended December 31, 2019 as follows:

Depreciation and amortization expense:

Company B
Depreciation and amortization expense
For the year ended December 31, 2019
Particulars	$
Depreciation expense for building (1)	$56,214
Depreciation expense for equipment and machinery (6)	$103,775
Depreciation expense for automotive equipment (10)	$21,000
Amortization expense for leasehold improvements (11)	$16,800
Total depreciation and amortization expense for 2019	$197,789

Table (1)

Accumulated depreciation and amortization:

Company B
Accumulated depreciation and amortization
December 31, 2019
Particulars	Amount	Amount
Accumulated depreciation-Building:
Balance, January 1, 2019	$263,100
Add: Depreciation expense for  2019	$56,214
Balance, December 31, 2019		$319,314
Accumulated depreciation-Machinery and equipment:
Balance, January 1, 2019	$250,000
Add: Depreciation expense for 2019	$103,775
Sub-total	$353,775
Less: Machine destroyed by fire (12)	$11,500
Balance, December 31, 2019		$342,275
Accumulated depreciation-Automotive equipment:
Balance, January 1, 2019	$84,600
Add: Depreciation expense for 2019	$21,000
Sub-total	$105,600
Less: Sold car during the year (13)	$6,300
Balance, December 31, 2019		$99,300
Accumulated amortization-Leasehold improvements:
Amortization for 2019		$16,800
Total accumulated depreciation and amortization for 2019		$777,689

Table (2)

Working note (1):

Compute the straight line rate:

Useful life = 25 years

$\begin{array}{c}\text{Depreciation rate}=\frac{\text{100\%}}{\text{25 years}}\times 1.5\\ =6\%\end{array}$

Working note (2):

Calculate the depreciation expense of building under 150%-declining balance method.

$\begin{array}{c}\text{Depreciation expense}=\left(\begin{array}{l}\text{Aquisition cost}-\\ \text{Accumulated depreciation}\end{array}\right)\times \text{Depreciation Rate }(1)\\ =\left(\text{\$1,200,000}-\$263,100\right)\times \frac{6}{100}\\ =\$56,214\end{array}$

Working note (3):

Calculate the depreciation expense of remaining machinery under straight line method.

$\begin{array}{c}\text{Depreciation expense = }\frac{\left(\begin{array}{l}\text{Cost of acquisation }-\\ \text{Residual value}\end{array}\right)-\left(\begin{array}{l}\text{The cost of machine }\\ \text{destoryed by fire }\end{array}\right)}{\text{Estimated useful life}}\\ =\frac{\left(\$900,000-\$0\right)-\$23,000}{\text{10 years}}\\ =\$87,700\end{array}$

Working note (4):

Calculate the depreciation expense for machine destroyed by fire under straight line method.

$\begin{array}{c}\text{Depreciation expense = }\left[\begin{array}{l}\frac{\left(\begin{array}{l}\text{The cost of machine }\\ \text{destoryed by fire }\end{array}\right)}{\text{Estimated useful life}}\times \\ \frac{\text{Depreciation incurred}}{\text{Months in a year}}\end{array}\right]\\ =\frac{\$23,000}{\text{10 years}}\times \frac{3\text{ months (Januray to March)}}{12\text{ months}}\\ =\$575\end{array}$

Working note (5):

Calculate the depreciation expense for new machinery under straight line method.

$\begin{array}{c}\text{Depreciation expense = }\left[\begin{array}{l}\frac{\left(\text{Cost of machine}-\text{Residual value }\right)}{\text{Estimated useful life}}\times \\ \frac{\text{Depreciation incurred}}{\text{Months in a year}}\end{array}\right]\\ =\frac{\$310,000-\$0}{\text{10 years}}\times \frac{\text{6 months (July to December)}}{12\text{ months}}\\ =\$15,500\end{array}$

Working note (6):

Calculate the total depreciation expense for machinery for 2019.

$\begin{array}{c}\begin{array}{l}\text{Total depreciation}\\ \text{expense}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Depreciation expense for remaining machinery+}\\ \text{Depreciation expense for machinery destroyed by fire+}\\ \text{Depreciation expense for new machinery}\end{array}\right]\\ =\$87,700(3)+\$575(4)+\$15,500(5)\\ =\$103,775\end{array}$

Working note (7):

Calculate the denominator of the fraction for sum-of-the-year’s digit.

$\begin{array}{c}\text{Sum-of-the-digits = }\frac{\text{n}\times \left(\text{n}+1\right)}{2}\\ =\frac{4\times \left(4+1\right)}{2}\\ =\frac{4\times 5}{2}\\ =10\end{array}$

Working note (8):

Calculate the depreciation expense of sold car under the sum-of the year’s digit method.

$\begin{array}{c}\text{Depreciation expense = Sales value }\times \text{Fraction (3rd year)}\\ \text{=\$9,000}\times \frac{2}{10}\\ =\$1,800\end{array}$

Working note (9):

Calculate the depreciation expense of car under the sum-of the year’s digit method.

$\begin{array}{c}\text{Depreciation expense = }\left(\text{Cost of car}-\text{Residual value}\right)\times \text{Fraction (1st year)}\\ \text{=\$12,000}\times \frac{4}{10}\\ =\$4,800\end{array}$

Working note (10):

Calculate the total depreciation expense of automotive equipment under the sum-of the year’s digit method.

$\begin{array}{c}\begin{array}{l}\text{Total depreciation }\\ \text{expense}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Depreciation expense as on January 1, 2019}-\\ \text{Depreciation expense for sold car +}\\ \text{Depreciation expense for new car}\end{array}\right)\\ =\$18,000-\$1,800(8)+4,800(9)\\ =\$21,000\end{array}$

Working note (11):

Calculate the amortization expense of leasehold improvements.

$\begin{array}{c}\text{Amortization expense =}\left[\begin{array}{l}\left(\frac{\text{Cost of leasehold improvements}}{\left[\begin{array}{l}\text{Number of months from }\\ \text{May 1, 2019 to December 31, 2025}\end{array}\right]}\right)\times \\ \text{Amortization incurred}\end{array}\right]\\ =\frac{\$168,000}{80\text{ months}}\times 8\text{ months (May to December)}\\ \text{=\$16,800}\end{array}$

Working note (12):

Calculate the accumulated depreciation for machine destroyed by fire.

$\begin{array}{c}\text{Depreciation expense = }\left[\begin{array}{l}\frac{\text{Cost of machinery}}{\text{Estimated useful life}}\times \\ \text{Number of year expense incurred}\end{array}\right]\\ =\frac{\$23,000}{\text{ 10 years}}\times 5\text{ years (2014 to 2019)}\\ \text{=\$11,500}\end{array}$

Working note (13):

Calculate the accumulated depreciation for sold car.

$\begin{array}{c}\text{Accumulated depreciation = Cost of car}-\text{Book value at 2019}\\ \text{=\$9,000}-\$2,700\\ =\$6,300\end{array}$

2.

To determine

Prepare a schedule screening the gain or loss from disposal of assets of Company B that would appear on the income statement for the year ended December 31, 2019.

Explanation of Solution

Prepare a schedule screening the gain or loss from disposal of assets of Company B that would appear on the income statement for the year ended December 31, 2019 as follows:

Company B
Gain or loss from disposal of assets
For the year ended December 31, 2019
Particulars	Amount	Amount
Gain on machinery destroyed by fire:
Insurance recovery	$15,500
Less: Book value of machine (12)	$11,500	$4,000
Less: Loss on car traded in on new car purchase
Book value of the traded car	$2,700
Less: Trade in allowed $\left(\$12,000-\$10,000\right)$	$2,000	$700
Net gain on asset disposal for 2019		$3,300

Table (3)

3.

To determine

Prepare the balance sheet of Company B and show the property, plant and equipment section as on December 31, 2019.

Explanation of Solution

Prepare the balance sheet of Company B and show the property, plant and equipment section as on December 31, 2019 as follows:

Company B
Balance sheet (partial)
Property, plant and equipment section
December 31, 2019
Particulars	Cost (A)	Accumulated depreciation and amortization ( B)	Book value $\left(A-B\right)$
Land	$150,000	0	$150,000
Building	$1,200,000	$319,214	$880,686
Machinery and equipment	$1,187,000 (14)	$342,275	$844,725
Automotive equipment	$118,000 (15)	$99,300	$18,700
Leasehold improvements	$168,000	$16,800	$151,200
Totals	$2,823,000	$777,689	$2,045,311

Table (4)

Working note (14):

Calculate the cost of machinery and equipment:

Particulars	Amount
Machinery balance on January 1, 2019	$900,000
Add: Machinery purchased during 2019	$310,000
Sub total	$1,210,000
Less: Machine destroyed  by fire	$23,000
Closing balance on December 31, 2019	$1,187,000

Table (5)

Working note (15):

Calculate the cost of automotive equipment:

Particulars	Amount
Automotive equipment  balance on January 1, 2019	$115,000
Add: Car purchased during 2019	$12,000
Sub total	$127,000
Less: Car traded during 2019	$9,000
Closing balance on December 31, 2019	$118,000

Table (6)